What is an S-Corporation

S-Corp is a regular Corporation, or LLC, with Tax advantages and certain restrictions.  It is not a separate type of business entity !

So What is it? An S-Corp is a regular Corporation, or LLC,  that has already been registered in a State as a business entity but has also elected to taxed under Chapter 1, Subchapter S of the Internal Revenue Code.

An S-Corp has some advantages for small companies but it also comes at the expense of many restrictions. Since the S-Corp status is a creation of federal Tax law the S-Corp may be taxed similar to a partnership, but simultaneously recognized as an ordinary corporation, or LLC, at the State level which gives rise to a host of accounting and tax issues.

For federal tax purposes an S Corporation entity will not be taxed separately, and all income will receive pass-through tax treatment like a partnership. However, in order to qualify for this treatment certain requirements must be met including that the company may not have more than 100 shareholders, may not have a shareholder who is a non-resident alien, and may not have more than one class of stock.

Advantages of and S-Corp

• Pass Through tax treatment like a Partnership
• Shareholders may be able to offset losses against income from other sources
• Shareholders not personally responsible for the debts of the business
• Easy transfer of ownership from one individual to another
• Continuous life span of the entity

Disadvantages of and S-Corp

• Limitation on number and type of shareholders
• Subject to same filing and reporting requirements as Corporations
• One class of stock may make it more difficult to raise capital
• Other corporations may not be shareholders.
• Ongoing annual reporting and filing requirements